NEWS / Foreign Exchange

Sterling in the picture today

• Treasuries digesting post-payrolls sell-off
• European bonds down in late Payrolls reaction
• Sterling in the picture today
• A European stock market conundrum?

EUR/USD held on firmly above 1.34 yesterday. Recall that in the morning, Asian traders took the pair up from the 1.3360 zone to above the 1.34 mark, on some disappointment over the limited reaction post-payrolls, fears for the upcoming G7 and renewed talk of more trade sanctions of the US against China. An escalation of such, potentially multilateral, trade barriers would be a dollar negative for the markets.

EUR/USD easily held on to these levels, but also didn??™t build on them. There was nothing to drive the markets any further apparently: no fresh news to deepen the first reaction on the above mentioned concerns. French industrial production improved, but this is not a first tier market driver.

Maybe even some market players could begin to doubt the necessity of a dollar negative reaction. After all, the ground for this sharp spike higher Tuesday morning is not so convincing. The momentum going into the G7 is as slow as a snail for any change to occur at this weekend??™s summit in Washington. There is no pressure on USD/Asia to move lower, or Asian currencies to appreciate as a consequence. (see USD/JPY part below). The very small trade sanctions applied in the US, in fact for now only glossy paper imports form China, are primarily for domestic use, so as the Republican White House can answer to criticism from the Democrat led houses. The Fed speakers yesterday stuck mostly to the same line as set before, so market reaction was almost nihil.

Our dollar scepticism is maintained for now in the present sell-USD-into-strength environment, especially in this current pro-euro sentiment across the board. If wrong, we would stop-loss though should EUR/USD slip below 1.3260.

Today, more Fed speakers are scheduled, but the most read will be the FOMC Minutes of the last meeting.

Regarding USD/JPY, some players are pinning their hopes on some yen strength in the run-up to the G7 of this weekend. We however feel there is no chance to see an alteration of the last statement, in which the yen also wasn??™t mentioned as a problem for rebalancing global growth. That dubious honour will continue to be handed to the Chinese yuan, although it appreciated much more against the USD over the past 1 ??-2 years than the yen??¦ The other G7 nations have little arguments to ask for yen strength as the BoJ has hiked since the last meeting and Japan does not intervene anymore.

Besides, the eco data coming out of Japan show some mixed signal to say the least. The industrial production data recently weren??™t strong. Now this morning, the core machinery orders fell by 5.2% M/M in February. Of course, these data are notoriously volatile, but still the worries are creeping in, as far as we are concerned. The trade data this morning also show export growth slowing and lending growth slowing.

Let??™s hope this isn??™t the beginning of the end for the Japanese revival... Anyway, the doubts are out there and this is no environment, as far as we see, for a sustained yen comeback.

That sentiment seems to be shared by the markets. Yesterday??™s dip in USD/JPY from the 119.30 zone to the 118.80 area has been unwound completely as the pair has returned above the 119 mark. This goes to show that the upside bias, which was installed last week upon the break above 118.50 is kept intact.

This morning, the two newcomers to the BoJ, Kamezaki and Nakamura, are expected to speak.

The overall strong euro attitude wasn??™t reflected at first sight in EUR/GBP, but that would be a too harsh judgment. Yesterday the pair held a sideways course, but this morning a sterling specific item caused commotion. Indeed, a story has erupted that the UK is looking at a potential tax exemption for British based multinationals repatriating overseas profits. This would be hugely sterling positive.

This morning, there was also tangible news that was very much sterling supportive. Indeed, the BRC retail sales showed the value of like-for-like sales rose a hefty 3.9% Y/Y, versus 3.3% Y/Y previously.

We continue to believe in a buy sterling-on-dips attitude for the longer term. In the short term this hasn??™t worked at all though we have to admit, but there is no denying that the UK indicators are still going strong. This could lead to a rate hike sooner rather than later (May!) and should be of support for the sterling. This could be the turning point which we are witnessing right here right now!